Greater Transparency over Green Products and Assets: Trends in the Use of Blockchain

#DLT #Reporting #DigitalProductPassport #GreenBonds #Tokenization

In a world where sustainability has become not just a trend but a necessity, companies and investors face the challenge of making green products and assets transparent and trustworthy. How can we ensure that our green efforts are more than just a marketing ploy? The answer might lie in blockchain. In this article, we explore the latest trends in blockchain technology that initiate an era of transparency in sustainability reporting – from Digital product passports to Green Bonds.

In recent years, as the global relevance of sustainability has grown, so too have the regulatory requirements or reporting obligations. Sustainability reporting (Non Financial Reporting Directive NFRD) has been mandatory in Europe for selected companies since 2014. With its reform under the Corporate Sustainability Reporting Directive (CSRD), the scope and nature of reporting will change profoundly from 2024 (read more about this in our white paper[1]). In addition to regulatory aspects, transparency over green products or investment and asset opportunities is also becoming increasingly interesting and relevant in the market. In this context, we have identified the top trends in sustainability related to blockchain.

Trend #1: Blockchain as an Enabler for Digital Product Passports Along the Value Chain

What is a Digital Product Passport?

Digital Product Passports are electronic documents containing detailed information about a product, such as its origin, materials, manufacturing process, and possible recycling options. One of the biggest challenges in designing Digital Product Passports, however, is sufficient data and information transparency along the relevant supply chain. It is often unclear which relevant characteristics of a product, aside from the material composition, should be considered in order to position itself more sustainably. Examples of these characteristics might include dependencies on suppliers or manufacturers, product use, repair, and proper disposal.

More transparency, please!

Blockchain technology can be an enabler for the comprehensive representation of all relevant product information in the form of the Digital Product Passport. Here are some potentials (selected examples, read more in the IW Report [3]):

Minimization of transaction costs and trust issues

• The decentralized architecture of the blockchain is based on Self-Sovereign Identities (SSI), allowing each participant in the product’s value chain to have their own digital and anonymous identity to provide data.
• This minimizes reservations or even risks regarding data disclosure and origin, and strengthens the trust of all involved parties.
• Additionally, transaction costs are reduced since all participants have access to data and full transparency at all times – the required information is comprehensively available and exploitable.

Reduction of Supply Chain Dependencies and Information Asymmetries

• Product users, recyclers, and recycling companies can understand the product composition, add product data and information, and gain insight into product application and repair.
• Thus, companies are no longer dependent on obtaining data from preceding or subsequent actors in the supply chain.
• The blockchain architecture further allows each participant to individually decide on the provision of information.

Reporting in green dimensions!

A Digital Product Passport could generate added value in various sustainability dimensions:

• Ecological sustainability: The origin and composition of products are made more transparent, and the materials or products used can thus be reintroduced and recycled in a circular economy.
• Economic sustainability: Increased information accuracy allows for new cost and payment models, e.g., in terms of quantity/material requirements since a more precise planning and billing along the value chain can be carried out.
• Socio-ecological sustainability: End consumers can make consciously sustainable purchasing decisions based on extended product information, e.g. for local or CO2-neutral products.

The visualization and analysis of relevant data is of overarching importance to all actors in the value chain of (primarily) tangible products, from the manufacturer to the end consumer. The standardization or definition of standards for details in the Digital Product Passport is already a part of the European Batteries Directive and the European Ecodesign Directive. Essential reporting information includes, for example, the product name and producer, characteristics and place of manufacture, as well as details on environmental and social indicators, such as the CO2 footprint or compliance with the Supply Chain Act. In the future, there will be further standardization of reporting in this area, to develop harmonized European standards for the Digital Product Passport system [4].

Trend #2: Transparency over Emissions of Green Bonds with the Help of Distributed Ledger Technology (DLT)

What are Green Bonds?

Green Bonds are issued to specifically finance projects with positive environmental impacts, e.g. for wind farms or sustainable waste management. The first Green Bond was issued in 2007 by the European Investment Bank (EIB), initiating this financing mechanism.

In Germany, Green Bonds are regulated by the general provisions for bonds contained in the German Securities Trading Act and other relevant regulations. To certify and ensure the green nature of the bonds beyond these general provisions, there are additional frameworks and standards that, so far, exist only on a voluntary basis. One such standard is the Green Bond Principles (GBP[5]) developed by the International Capital Market Association (ICMA). These principles are voluntary guidelines that promote transparency and disclosure and help to ensure that the funds from the bonds are used for green projects.

The GBP contains four components that issuers of Green Bonds should consider:

• Use of proceeds: How the proceeds are used is described in the bond prospectus. Nine categories of projects are eligible for Green Bonds: from renewable energy to sustainable waste management and clean mobility projects (read more about the nine categories in [5]).
• Project selection process: The issuer discloses the criteria used to select and assess green projects. The sustainability goals of the project are also outlined.
• Management of proceeds: The collected proceeds are to be managed separately. A formal internal process ensures that the proceeds are used exclusively for the lending and investment activities of the green projects.
• Reporting: At least once a year, the issuer reports on the investments until the funds have been fully allocated.

More trust, less ‘greenwashing’!

Within the framework of these GBP, the German government has also issued its own Green Bonds to support the financing of sustainable projects within the federal budget while simultaneously fostering the development of the market for sustainable bonds. The motivation for issuing Green Bonds by other German issuers, as well as the demand from private and institutional investors, however, has been clouded by “greenwashing” scandals. In the past, the voluntary and unregulated standards were not taken seriously enough, and for instance, ESG criteria were “portrayed greener” than they actually are [6]. This leads to a loss of investor trust and a higher risk for issuing new Green Bonds. To address these challenges in the future and to enhance trust in Green Bonds, both as a financing tool and as an investment option, blockchain can represent a key technology.

The first examples of the use of blockchain-based Green Bonds were shown by the Bank for International Settlements (BIS), which in 2022 carried out two prototypes within the “Genesis” project[7], in cooperation with Goldman Sachs, Allinfra, and a private digital asset consortium (Project Genesis 1.0), as well as with InterOpera (Project Genesis 2.0).

The blockchain served to store data collected from wind farms via sensors and to sell shares or bonds issued by the wind farm operator to small investors. Standards were created over the actual green of an emission, and investors received real-time transparency about the environmental effects of the use of proceeds from the Green Bonds. Also, the ESG-relevant data on sustainability were made measurable and could be stored in the blockchain. The distributed ledger technology (DLT) used here, with restricted access for tokenizing the assets, is characterized by low energy intensity and thus also supports the sustainability concept for the use of blockchain. The prototypes demonstrate potential for future emissions to be transparent and accessible through Green Bonds with the help of blockchain. [8]

More standards, please!

The scandals mentioned above related to “greenwashing” still create uncertainty on the part of issuers and investors. However, as the examples above show, Green Bonds as a tokenized asset offer several advantages, primarily increased transparency and a trust basis for the available green data and developments. For issuers, setting up new Green Bonds has benefits as it signals a green business orientation alongside green reporting, generating trust in the green asset classes. Particularly, banks can utilize the tokenization of issued Green Bonds for private investors to reduce balance sheet value. This model also offers advantages for (small) investors, because they are able to participate in illiquid projects to combat the energy transition. Furthermore, the DLT with access restrictions increases the security of the disclosed sustainability data, thus reducing the risk of “greenwashing.”

In the future, more European standards and guidelines will be required to further regulate investments in this asset class and, above all, to establish uniform reporting standards. Green Bonds remain an asset class with great potential and increasing demand. Further German examples in the market should therefore not be long in coming.

Conclusion: Trust is good, blockchain is better!

With the top trends for Digital Product Passports and Green Bonds mentioned above, the following success factors can be summarized:

• The use of DLT with access restrictions creates trust and minimizes the risk of “greenwashing”
• A variety of sustainability parameters can be made accessible and evaluable (in real-time)
• Balance sheet effects can be achieved through the tokenization of issued Green Bonds
• Access to green investments or projects can be expanded or created for institutional and private investors

Clearly, blockchain for more transparency of green products and assets is gaining further relevance. The success factors can only fully unfold in the European space through standardization and uniform guidelines to make the use of DLT for sustainability a long-term success with high value.

Have we drawn your attention in possible reporting solutions for sustainability parameters with the use of blockchain technologies and tokenization?

Contact us directly or stay up to date with our Blockspace: https://www.horn-company.de/blockspace/

SOURCES AND INFORMATION

[1] https://www.horn-company.de/wp-content/uploads/2023/06/4.RLK-2023-HC-ePaper-ESG_060623.pdf

[3]  https://www.din.de/de/mitwirken/normenausschuesse/nia/digitaler-produktpass

[4]  https://www.iwkoeln.de/fileadmin/user_upload/Studien/Report/PDF/2023/IW-Report_2023-Digitaler-Produktpass.pdf

[5]  https://www.icmagroup.org/assets/documents/Sustainable-finance/2022-updates/Green-Bond-Principles-June-2022-060623.pdf

[6] https://www.ft.com/content/38be4231-21cf-46e3-8b6a-88a4e923f01c

[7]  https://www.bis.org/publ/othp58.pdf

[8] https://www.lbbw.de/perspektiven/themenspecials/emissionshandel/news/tokenisierung-im-emissionshandel_ae6nicmobp_d.html

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